Western Independent Banker - November/December 2008 - (Page 21)

By Kevin Tweddle The Best of the West: Traits of the Region’s Highest Performing Community Banks WITH A STRONGER commercial economy than other regions of the country,1 the Western states offer banks tremendous growth opportunities, particularly in commercial banking—and many institutions are capitalizing on this strength. In addition, historical financial and market statistics demonstrate that the region contains community banks that are among the highest performers in the country. The Western states also typically rank among the highest in deposit growth and in the number of households and businesses per banking branch. This begs the question, “Are there common traits that distinguish the great performers from the good?” Yes, absolutely. So who are the region’s highest performers and what are the common denominators that have the greatest correlation to their performance? We’ve taken a look at 31 of the top-performing institutions, averaging $680 million in assets,2 from across the states within the Western region. The traits of these high performers are strikingly similar not only to one another but to the highest performing community banks across the country. The collective YTD average return on equity (ROE) for this group is 17.6 percent; this places the banks in the top 4 percent nationwide. This is a particularly compelling statistic if you consider that the region’s entire community banking market has an ROE of 2.1 percent. The region’s highest performers also have a YTD return on asset (ROA) of 1.87 percent; this places them in the top 3 percent in the country compared to a regional average of .08 percent. Additionally, the asset quality, charge offs and non-performing loans for this group are better than other banks in the region. These banks have well-diversified loan portfolios that have served them well during this economic downturn. Another notable characteristic for this set of banks is that they have a remarkably strong core deposit base. Transaction accounts (NOW, savings and money market) make up approximately 55 percent of their funding composition; this places them in the top 14 percent of all banks in the United States. These high performers have a very healthy amount of non-interest-bearing demand deposit accounts and they are naturally less reliant on wholesale funding sources such as brokered CDs and Federal Home Loan Bank advances. More transaction account volume not only means a lower cost of funds, but also better service charge fee income. It is interesting to note that they are collecting 56 basis points of deposit service charge fees on every transaction account dollar, which is actually well below U.S. and Western regional averages. Interestingly, the loan yields for this group of banks is an average of 7.71 percent versus a regional average of 7.85 percent; this point appears to show that the region’s highest performers are more conservative in their lending practices—a factor contributing to stronger asset quality. Nonperforming loans to total loans for the group totaled 52 basis points, well below the U.S. average. Probably the most differentiating statistic is that the average cost of funding for this group is 2.63 percent, while the region’s average is 3.2 percent. That’s not a misprint: high performers have a 57 basis point advantage over their peers in the Western region. Clearly, these banks manage the liability side of the balance sheet better than other banks in the region. These high performers’ loan volumes (average loans to average assets) are strong as well, and this volume is enabling them to successfully maximize their net interest margins. Case in point: the net interest margin for the Western banks is 4.66 percent; the highest performers’ average net interest margin is 5.05 percent, placing them within the 92nd percentile in the United States. Another defining statistic of these banks is that their revenues per full-timeequivalent employee (FTE) are higher than the other banks within the region. On average, this group’s revenues per branch are $9.9 million with revenues per FTE of $278,000. This is a key indicator of the tremendous efficiency at which these banks operate. They also compensate their employees well. The average salary/benefits package per employee is $68,500, well above the U.S. average. These metrics hold true during any economic environment— hire fewer, better-qualified individuals and maximize your use of technology and you will need fewer employees as you grow your institution. Also worth mentioning is that 11 of these 31 banks have some form of wealth management offering, which points to the fact that they are doing a good job of generating alternative sources of fee income. There isn’t one big idea or silver bullet that differentiates high performing banks from others; rather, it’s their ability to move the needle a little bit more each day in a few key areas. Western Independent Banker November/December 2008 21

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Western Independent Banker - November/December 2008 Contents A Message from the President & CEO A Practical Approach to Director Evaluations Director Assessment: New Standards for a High Performing Director The Best of the West: Traits of High Performing Banks Best Practices Checklist for the Audit Committee The Real Performance Metric: It Takes a Balance of Profitability and Growth to Be Successful The Role of the Board in a Credit Crisis A Bank Director's Obligation to Be Aware of Regulatory Change Benefits Tied to Performance Receive Higher Approval Rating by�Board Members Increasing Shareholder Value: Key Profitability Drivers Board Portals Streamline Efficiency for 21st Century WIB Service Corporation Report WIB Calendar Welcome New Members Index to Advertisers advertiser.com

Western Independent Banker - November/December 2008

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